Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
I know what happens if you overfund a 401K with pre-tax dollars.
But what if you overfund with after tax? Meaning, inclusive of all pre-tax, employer match, and after tax, you go above $51K in total contributons?
I assume the plan has to refund it to you, but there are no tax consequences (except on the earnings). Is there a penalty?
Now, what if the funds are no longer in the plan? Some plans allow you to take after-tax withdrawals from the plan. How are withdrawals treated in the $51K limit?
If I withdrew the money, and was above $51K, then do I just give the money to myself? Huh?
Now, for another twist, what if I withdrew the money and rolled it to a Roth IRA? Do I have to take the money out of the Roth? How much? Just the rolled over amount, or any post-rollover earnings as well? Is there a penalty?
Curious to see what the answers are here.
- Posts: 249
- Joined: 24 Dec 2012
I'm curious about this as well.
- Posts: 1840
- Joined: 18 Jun 2010
You must take a corrective distribution of the excess annual additions and the taxable amount of that distribution is reportable on line 16b (not line 7) for the year distributed, not for the year the excess additions are made. There is no early withdrawal penalty on the taxable portion. What gets complex is the plan determination of how much comes from after tax contributions, pre tax deferrals and earnings, but the taxable amount will show in Box 2a. The distribution is paid to you and it is NOT rollover eligible.
Now if you already took a distribution, in service or otherwise and rolled it over to an IRA, since the excess amount is not eligible for rollover, you have an excess contribution to the IRA. This is treated as an excess regular contribution that is corrected in the usual manner if done before the extended due date. Earnings on the excess in the IRA are taxable are subject to penalty. If all this is not addressed before the extended due date (10/15 of the year following the year of the rollover or conversion), then you will owe a 6% excise tax for each year the excess remains in the IRA. There are automatic corrective actions that can reduce the excess and that is handled on Form 5329.
On top of the tax and penalties which can vary based on the type of IRA the rollover went to and when it is corrected relative to the extended due date, you will have a messy reporting situation since the IRS does not specify a reporting template. Since the excess was not rollover eligible, it would be reported as if it had not been rolled over on Form 1040 but since you will get a 1099R for both the plan distribution and the IRA corrective distribution, you have to explain to the IRS what happened so you will not be taxed twice on the same amount. If the excess distributed from the plan is after tax, you must get the 8606 correct if the amount goes to a TIRA before the Roth since this basis will not stay in your TIRA if it is removed as an excess IRA contribution. Or you might have rolled the excess directly from the plan to your Roth IRA which will not involve an 8606 so this is somewhat easier to handle and report.
- Posts: 2681
- Joined: 16 May 2011
- Location: Prescott, AZ
Return to Investing - Theory, News & General
Who is online
Users browsing this forum: cthen, furwut, Ged, Johm221122, larryswedroe, MilkMoney, ruralavalon, The Wizard and 32 guests